Can Aventis Fight Off Its Hostile Suitor?

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Sanofi-Synthelabo’s hostile $58 billion bid to acquire its French pharmaceutical rival Aventis has roused European markets and French pride. Even though the merger could cost thousands of French workers their jobs, the deal appears to have the blessing of government officials who hope to breed – or at least preserve – a national champion in the high-profit pharmaceuticals sector.

Aventis, however, is fighting back. The company complains it is actually the stronger of the two companies and is more valuable to shareholders on its own. It is also openly seeking a White Knight.

Yet analysts say it is only a matter of time, and price, before Aventis agrees to become a part of Sanofi. The combined company would be the world’s third largest drug maker by sales – behind Pfizer, based in theU.S., andBritain’s GlaxoSmithKline – with 100,000 employees around the world. “This is a marriage of convenience, not a marriage of love,” says Claude Allary, a managing partner at the Parisian life sciences consulting firm Bionest Partners.

Both companies are mid-sized players in the global market with complementary product lines. Sanofi, whose top drugs include the anti-stroke medicine Plavix and the sleeping pill Ambien, had sales of 8.08 billion euros ($10.3 billion) last year. Aventis, which markets the allergy drug Allegra and the blood-clot medicine Lovenox, had sales of 16.79 billion euros ($21.5 billion) in 2003.

Aventis, itself, was created by the 1999 merger of Rhone-Poulenc ofFranceand the pharmaceutical operations of the German chemical-maker Hoechst A.G. Sanofi has evolved through a string of drug and beauty businesses assembled by its chief executive, Jean-Francois Dehecq.

“It’s going to be a tough fight,” says Wharton management professor John Kimberly. “There is a really strong desire on Aventis’s part to stay independent, particularly of Sanofi. On the other hand, Dehecq is a strong dealmaker and has done a number of deals while at Sanofi that have turned out to be productive and profitable.”

If left on its own Sanofi could become a takeover target. Sanofi’s two controlling shareholders – Total, the French oil company, and L’Oreal, the cosmetics firm – have a pact agreeing not to sell their Sanofi stakes. However, that agreement expires later this year. Total has already said it supports the Aventis takeover. At the same time, Sanofi is facing a key patent expiration on its top-seller, Plavix, that would leave a gaping hole in its product portfolio.

“It is really a well-timed play for Sanofi,” says Philippe Haspeslagh, a professor at Wharton’s alliance partner INSEAD. “In many ways, Sanofi needs Aventis more than the reverse.” Aventis could provide a better distribution network to Sanofi, particularly in theUnited Stateswhere Aventis has a stronger foothold. The combined company, Haspeslagh notes, could gain critical mass in research and development in certain therapeutic areas, although that might be difficult to achieve if the relationship remains hostile.

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Aventis has argued that the markets have undervalued its potential pipeline and it is scrambling to find ways to cut costs and divest under-performing businesses. “This may be a preemptive move on Sanofi’s part,” suggests Sean Nicholson, Wharton professor of health care systems. “Aventis is trying to tell its shareholders that Sanofi is a company that’s weak, so why would you want to sell to a company that’s weak?”

The French government, which has a long history of aiding favored corporations and industries, appears to be offering support for the Sanofi bid and has provided no regulatory obstacles so far to the merger. This is despite the potential loss of up to 12,000 high-paying jobs inEurope, including many inFrance. “The speculation is that the French government is fearful a non-French company will gobble up either of the two and they will be left with one minor pharma player as opposed to one major player,” says Nicholson.

Analysts see Dehecq’s well-publicized friendship with French president Jacques Chirac as another sign of government approval. “Politically, Dehecq is supported by the aid of the state inFrance. He’s a friend of Chirac’s and probably Chirac backed the way the deal has been constructed,” says Eric Le Berrigaud, an analyst with Natexis Bleichroeder inParis.

Rob Burns, Wharton professor of health care systems, notes that in many European countries the pharmaceutical industry is a national treasure. “It’s high-tech and it’s a high-margin, high-growth business, or at least it has been, and other parts of the world are trying to grab a portion of it –India,Southeast Asia,Japan. The French government has an interest in making sure that if Aventis is taken over, it’s by another French firm. [European governments] are already seeing some of the research capability of these pharmaceutical firms brought over to theU.S.”

Despite its profitability, the drug industry has recently been facing a spate of well-publicized problems, including a dearth of new products coming out of its development pipeline. As a result, it has been consolidating rapidly for more than a decade as firms combine to cut costs, gain access to new products, and augment their own sales forces. “The merger and acquisition boom began in this industry in the late 1980s and hasn’t abated much,” says Burns.

Mergers’ Mixed Results

Meanwhile, the success of pharmaceutical mergers has been questioned. Research by Nicholson and Patricia Danzon, a Wharton professor of health care systems, indicates that mergers don’t necessarily deliver what they promise. “Most of the evidence suggests that mergers don’t really solve any problems. It’s not at all obvious that there are big economies of scale in research and development or even marketing. At best, all a merger can really be used to do is gain a few years of cost reductions,” says Danzon. “But as a long-term solution to building a productive pipeline, I think all the evidence suggests mergers don’t do it. I have no reason to think in this case it’s going to be any different.”

Nicholson suggests that the consolidation of two French firms into the number-three global drug company is not likely to put great new pressure on Pfizer or other competitors. “The most interesting thing you’re going to see is that some products are spun off. This will create opportunities for smaller firms that want to buy these things and put real marketing muscle behind them.”

In the early days of the trend in pharmaceutical mergers, one big deal had a tendency to drive others, Nicholson adds. “You get the phenomenon of follow-the-leader when the industry thinks that is what investors want it to do. But I don’t think investors consider these mergers to be that valuable. When the mergers picked up in 1993 and 1994 there was an argument that you had to be big to achieve scale. I think that falls on deaf ears now. There are plenty of small companies that are doing just fine.”

According to Haspeslagh, the cross-border German-French merger that gave birth to Aventis has been fairly successful in creating an integrated culture. “Aventis as a merger was a relatively unique success in terms of both cross-border mergers and equal mergers,” he says. “The fact that the French now claim this as the emergence of a national champion must leave a bad taste in the mouth of the Germans at Hoechst who agreed to have the headquarters across the border.”

Danzon points out that if the merger does occur, developing a common culture for the new firm may be a smoother process because both Aventis and Sanofi have large French components. “It may be easier than it would be to do aU.S.or a Swiss company with Aventis, but it is never easy.”

The merger proposal is also unlikely to generate a White Knight to rescue Aventis, although the company has said it would be open to a friendly overture. One company mentioned is Novartis, which has been looking to gain scale for some time, but has set its sights on its Swiss rival, Roche. So far, Novartis has been spurned by members of Roche’s controlling family.

“Aventis is looking for a White Knight but I think this will be quite difficult,” says Christophe Van Vaeck an analyst with KBC Securities inBrussels. He points out that Aventis has had a large supply of free-floating shares for years that have not captured an acquirer’s interest. “Why would somebody jump in now and buy it for a price that is higher than it would have been a few months ago?”

Sanofi calculates that its bid is a 15% premium over Aventis’ average share price in the month before the offer. Aventis chief executive Igor Landau has said it will take another 40% to 50% over that to get his attention. Aventis’ key shareholder, Kuwait Petroleum Corp., which owns 13% of the company, has indicated the current asking price is too low. “I think that the chance Aventis will stay alone is relatively small,” says Van Vaeck, “but there is a chance Sanofi will have to increase its bid to get shareholders to sell their stake.”